Gold Bullion, Stocks or Bonds: Which Have More Long-term Investment Risk?

In proclaiming buy-and-hold investing to be dead, the pseudo-experts masquerading as financial advisors have abandoned the fundamental principle of investing: buying undervalued assets – and then giving those assets the time necessary to mature. Instead, these charlatans have forced their clients to become short-term gamblers. Worse still, they are now consistently steering their clients toward the worst possible asset-classes, stocks and bonds, rather than the best ones [simply because they do not]understand the fundamental conceptual difference between risk and volatility. In a market populated by panicked lemmings, we cannot avoid volatility. However, we can and must reduce risk – which begins by building an allocation of history’s true safe haven asset, precious metals. [Let me explain more about what risk and volatility are and are not.] Words: 1080

So says Jeff Nielson (www.bullionbullscanada.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Nielson goes on to say, in part:

[I am surprised at the large number of] investment professionals who confuse risk and volatility… regularly and thoroughly confusing these two concepts to the point where the terms are treated as being virtually synonymous. This has resulted in the flawed investment principle that reducing volatility will (and must) reduce risk. Such thinking is deeply misguided, and following it has dire consequences for investors.

As always, logical analysis starts with a definition of terms…[and] while it can be very difficult to quantify risk, defining it is simple.

Risk, in the context of investment, is the probability that something you purchased will end up being worth less than what you paid for it when you decide to sell it.

Volatility, on the other hand, is a concept that is as easy to recognize in the real world as it is to define. Volatility is a purely mathematical concept that refers exclusively to “deviations from the mean.” If we establish a trend line for the price of any good/investment (often referred to as a “moving average”), volatility refers to the average size of the bounces in price on either side of the trend line. Most importantly, to the long-term investor, volatility is a small factor in assessing risk.

[The above] definition of volatility…provides us with little insight about risk because it implies absolutely nothing about the direction of the trend for any particular investment, i.e. up or down. A particular investment can have a volatility of effectively zero, while marching steadily down to a valuation of zero [and] the closest and most obvious example of [that] would be the U.S. dollar…

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The Federal Reserve has a statutory mandate to “protect the dollar” from risk, i.e. avoid a loss in value. In practice, however, the Federal Reserve has never followed that mandate; instead, it has sought to only minimize volatility [and, as a] result, the US dollar has steadily lost 98% of its value in the 98 years of the Fed’s existence,. The Fed has succeeded in minimizing volatility throughout this long plunge in value, however, it has failed utterly in protecting dollar-holders from risk, or economic losses caused by holding dollars.

While no one likes the idea of a 98% loss, when spread over the very long-term, this may not seem like much of a risk but, when we note that 75% of this decline has occurred just in the last 40 years,… [we realize just how great it is]. When we further note that this alarming rate of currency-dilution has accelerated significantly just in the last five years, this should be enough to cause all rational dollar-holders to break into a cold sweat. [In spite of that, however,] clueless media drones still point to the dollar as a “safe haven,” basing this suicidal advice entirely on the fact that the dollar represents (relatively) low volatility – while totally ignoring the absolute risk represented by an accelerating, century-long trend toward zero.

Living in an era where all of our governments have promised to race each other in driving the value of their currencies to zero, i.e. participate in “competitive devaluation”, we finally see the truth about the world of fixed-income investments – the banker-paper in which they are denominated is plummeting in value at an unprecedented rate, providing guaranteed losses rather than the supposed guaranteed income. It is the perfect illustration of the cliché of “the lobster in the pot.” The lobsters (bond-holders) may be entirely comfortable thanks to the slowly rising temperature of the water; however, they’re still going to end up boiled alive!

Indeed, it is widely reported that real interest rates have never been so negative at any time in history [as they are now], i.e. that the gap between what we earn in interest and what we lose in currency-dilution (i.e. inflation) has never been this large at any time in the history of modern markets. Precisely how do the largest guaranteed losses in history on fixed-income investments represent a “safe haven”? This is something that the “experts” conveniently omit in dispensing their foolhardy advice.

Conclusion

Readers must realize that there are viable options. Once we correctly define the problem, namely protecting ourselves from risk, we can begin to understand the solution to our problem: looking for investment products and opportunities which minimize risk rather than merely minimizing volatility.

The obvious starting point in such a search is to look at bonds vs. bullion. In the case of bonds we have U.S. interest rates currently at almost 0% (i.e. no return) and virtually no hope for price appreciation. On top of that, they are denominated in US dollars, which have already lost 98% of their value – and are losing value even faster every day. Fiat currencies also have their own track record: a 1,000+ year history of always going to zero. We immediately see how utterly irrelevant it is that US Treasuries are a relatively low-volatility asset. There is no less-volatile number than zero!

Then there is bullion: a real safe haven. In the case of gold and silver, we have an asset class with a 2,000+ year track record for preserving wealth, combined with a 10+ year up-trend in this recent bull market. That is safety. What more can I say!

History has shown that investors who stick to disciplined, fundamental-focused strategies give themselves a good chance of beating the market over the long haul and one of the investment gurus who has compiled the most data on that topic is James O’Shaughnessy, whose book What Works on Wall Street became something of a bible for investment strategies when it was released 15 years ago. Now, O’Shaughnessy has released an updated version of his book, with a plethora of new data on various investment strategies. Using data that stretches back to before the Great Depression in some cases, O’Shaughnessy back-tests numerous strategies, and comes to some very intriguing conclusions. [Let me share some of them with you.] Words: 1345

While gold is slightly more volatile than the Dow 30, on average, all of the individual components are more volatile than gold and only half are less volatile than silver and platinum. [So much for] the prevailing myth…that they are risky investments due to their volatility. [Let’s take a closer look at the specifics.] Words: 250

We are reading a lot of hype these days about gold and the necessity to own it but only about 2% of ‘investors’ actually have gold in their portfolios and those that have done so have insufficient quantities to offset the future impact of inflation and to maximize their portfolio returns. New research, however, has determined a specific percentage to accomplish such objectives. Words: 1063

Benjamin Graham, known as the father of value investment, is famous for his simple, yet powerful, valuation method as first explained in his 1973 book, Intelligent Investor, and later updated in his book entitled Renaissance of Value. His “Graham Number” approach has been adapted and applied to all 30 stocks listed on the Dow Jones Industrial Index to determine which of the stocks have above average safety factors – of which only 10 do. Below is an explaination of the approach, the formula and the results for all 30 stocks. Words: 1220

Benjamin Graham, the “godfather of value investing” created an equation to calculate the maximum fair value for a stock, referred to as the Graham Number and any stock trading at a significant discount to this number would appear undervalued. [Here are the names of 18 such stocks.] Words: 1707

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